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Nestle: Muted profit performance - Views on News from Equitymaster
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Nestle: Muted profit performance
Apr 26, 2012

Nestle India announced the first quarter results of calendar year 2012 (1QCY12). The company has reported 13% YoY and 7.8% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Nestle posted a 13% YoY increase in topline led by a 13.7% YoY rise in domestic revenues. Exports grew by a subdued 3.3% during the quarter.
  • Backed by higher realizations and a favourable product/channel mix, the operating profitability improved by 90 basis points.
  • At the net level, higher depreciation and tax outgo shaved off 70 basis points from profit margin. Even interest charges shot up during the quarter as the company further raised USD 21 m of external commercial borrowings to fund its capital expenditure.

Financial snapshot
(Rs m) 1QCY11 1QCY12 % change
Revenue 18,144 20,559 13.3%
Expenditure 14315.7 16030.7 6.1%
Operating profit (EBDITA) 3,829 4,528 18.3%
EBDITA margin (%) 21.1% 22.0%  
Other income 83 52 -37.8%
Interest 1 23 3142.9%
Depreciation 327 528 61.3%
Impairment of Fixed Assets   -  
Provision for Contingencies - -  
Profit before tax 3,584 4,029 12.4%
Tax 1,027 1,272 23.9%
Profit after tax/(loss) 2,557 2,757 7.8%
Net profit margin (%) 14.1% 13.4%  
No. of shares (m)   96.42  
Diluted earnings per share (Rs)*   101.81  
Price to earnings ratio (x)*   46.5  
* on trailing 12-months basis

What has driven performance in 1QCY12?
  • Domestic sales that contribute a majority of 95% to overall sales grew by a relatively subdued 13.7% as the company increased focus on optimizing its product portfolio in an uncertain economic environment. Export turnover grew by a slower 3.3% as exports to affiliates declined by 10% during the quarter. Therefore overall sales growth for the quarter moderated to below 15% for the first time in the last four quarters.

    Segment-wise performance
    As a % of sales 1QCY11 1QCY12 Change in basis points
    Raw material 48.7% 45.6% -308.25
    Staff costs 6.6% 7.5% 88.37
    Other expenditure 23.5% 24.8% 127.49

  • Price hikes and favourable mix enabled the company to keep input costs under control. Therefore cost of goods sold grew by a mere 6% and as a percentage of sales dropped by 308 basis points during the quarter. This cost rationalization has more than offset the increase in staff costs and other expenditure (as a percentage of sales). As a result, operating margin improved by 90 basis points to 22%.

  • The robust 18.3% rise in operating profit has not percolated to earnings that grew by a mere 7.8% during the quarter. A 61% jump in depreciation outgo after the recent commissioning of the Tahliwal facility and a 24% rise in tax outgo, particularly in case of the Pantanagar facility, led to subdued rise in company's net profit. Additionally, interest expenses shot up to Rs 23 m in 1QCY12 as the company further raised external commercial borrowings to the tune of USD 21 m to fund its capital expenditure.

What to expect?
Nestle is witnessing moderation in sales. For 1QCY12, its sales growth slipped below 15% for the first time in the last four quarters. The company is facing increased competition in food categories such as noodles and value added milk products.

Nestle has been aggressively adding capacities to widen its product portfolio. Over the past five years, the company has spent Rs 28 bn in capital investments and in 2011 alone, investments crossed Rs 17 bn. The company is not only expanding existing capacities but is also setting up new facilities using a mix of internal accruals and debt. Consequently, the company's debt-to-equity ratio shot up from nadir to 0.8 in 2011. This has led to steep rise in interest expenses.

At a price of Rs. 4735, the stock is trading at 30 times our estimated CY14 earnings. Nestle's diversified portfolio, strong brand equity and capacity expansion is expected to keep it on a robust growth trajectory. But at current valuations, the stock appears overpriced and we would advise investors to exercise caution.

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